A borrower takes a 30-year,fully amortizing,5/1 ARM for $225,000 with an initial interest rate of 4.375%.Assuming the index on which the loan rate is based rises by 1% in the fourth year of the loan and remains at that level,what will the payment be in the sixth year of loan?

Question

Quizplus · Accepted Answer

The 5/1 ARM means the interest rate remains fixed for the first 5 years and then adjusts annually. Since the index rises by 1% in the fourth year, the new interest rate in the sixth year would be 5.375% (initial rate of 4.375% + 1%). Using a mortgage calculator or formula for a new 25-year term (since 5 years have passed) at the new interest rate of 5.375% on the remaining balance, the closest payment option is $1,241.89.

A Borrower Takes a 30-Year,fully Amortizing,5/1 ARM for $225,000 with an Initial